It looks like returns on asset-backed securities will fluctuate this month, as investors move in and out of various segments of the bond market.
Although asset-backed spreads appear on track to remain relatively stable for the next few weeks, prices certainly aren’t – since a variety of economic factors are motivating investors to periodically sell Treasury bonds and swaps and use the proceeds to buy securitized products. “Looking ahead to August, we expect yields to remain volatile as the broader bond market wrestles with macroeconomic demons,” wrote Bane One ABS-research chief Alex Roever in a recent report.
Because it’s hard to predict when – and to what extent – investors will be buying ABS or other bonds, many routine issuers have temporarily stepped away from the market in recent weeks. The resulting dip in new-issue volume helped spur a flurry of activity in the secondary market. Market players reported that roughly $4 billion of outstanding ABS was available around mid-week, most of which was backed by popular assets. “People are fishing, trying to take profits before spreads widen out,” said one market player.
For the most part, industry participants believe that spreads on top-tier asset-backed products will widen later this year. Many had expected that to happen as early as this month. But because demand remains strong, spreads are now likely to remain largely unchanged through Labor Day, even as yields continue to swing.
Sallie Mae’s latest offering provides an example of the healthy demand. When Credit Suisse First Boston and Merrill Lynch priced the $2 billion transaction on Wednesday, investors eagerly snapped up the deal’s $372 million of senior one-year bonds at 1 bp over Libor. The three-year senior class, totaling $528 million, priced at 4 bp over Libor.
Capital One also achieved narrow spreads on the $500 million credit-card issue that it priced via Barclays Capital and Wachovia a day earlier. The top-rated bonds sold for 11 bp over Libor, which was 1 bp tighter than initial price talk.
Even longer-dated paper is still attracting buysiders’ attention provided it comes from top-tier issuers. MBNA, for example, found a huge audience for seven-year credit-card bonds last week. “We up- sized it to $750 million [from $650 million], and we could have taken it up higher,” said vice chairman Vernon Wright. The bonds, managed by First Boston and Morgan Stanley, priced at 19 bp over Libor – 3 bp tighter than a similar issue in April.
Plenty of new deals are on lap for this month, including a number of CDOs. Among them is an offering from New York money manager NorthStar Capital, which runs a $1.5 billion portfolio of real estate investments. Its $402 million transaction is called N-Star Real Estate CDO. NS Advisors, a NorthStar subsidiary, is managing the transaction’s underlying pool of commercial-mortgage bonds, REIT bonds and other CDOs backed by real estate collateral.
Citigroup has also started showing investors a unique securitization of hedge-fund shares that it is conducting with PlusFunds, a New York advisory firm. The collateral pool for Sphinx, a so-called collateralized fund obligation, mimics the S&P Hedge Fund Index.
Meanwhile, word has it that Man Investment Products and affiliate Glenwood Group are close to pricing their second joint CFO, called Man Glenwood Alternative Strategies II. J.P. Morgan Chase is underwriting the $500 million transaction.
Copyright HARRISON SCOTT PUBLICATIONS Aug 1, 2003
